Bonds are financial instruments that can be bought, sold, and issued on the bond market. There are two types of markets for this: primary and secondary. Bonds are the most common vehicle for doing this, but notes, bills, and other instruments for financing public and private expenditures are also acceptable. Let’s discuss what is bond market with examples in this topic.
A bond purchaser (also known as a “bondholder”) effectively loans money to the issuing corporation in exchange for the security of the bond. Governments, businesses, and municipalities all turn to bond sales when they’re short on cash. If an investor buys a government bond, they are effectively loaning money to the government. In exchange for a fixed interest rate and interest payments on maturing bonds. Investors essentially loan money to the issuing corporation. A bond is similar to a loan in that interest is accrue on a regular basis and the principal is repayable on a predetermine date.
What is Bond Market?
Debt securities are traded on the bond market, which also goes by the names debt market, fixed-income market, and credit market. In most cases, governments issue bonds to finance budget deficits or infrastructure projects. Bonds are issued by publicly tradable companies to raise capital for things like expansion initiatives and general operating expenses.
There are two main segments within the bond market: the primary market and the secondary market. All transactions in the main market occur directly between bond sellers and bond buyers, hence the name “new issues market.” New debt instruments that have never been offered to the public previously are created and sold in the primary market.
Securities that have already been sold in the primary market can be bought and sold on the secondary market. These bonds are available for purchase through a broker, who facilitates transactions between buyers and sellers. These secondary market securities can be assemble in a wide variety of vehicles. Including mutual funds, pension plans, and life insurance policies. Bond investors should be mindful that the highest yielding bonds, known as “junk bonds,” also have the largest default risk.
History of the Bond Market
Bonds, as opposed to equities, have been tradable for considerably longer. Actually, transferable loans originally existed in ancient Mesopotamia, when debts based on the weight of grains could be transferred between borrowers. A clay tablet detailing the history of debt instruments was discovered in 2400 B.C. in what is now Iraq, at the ancient city of Nippur. This artefact depicts a debt for grain and the consequences of not paying it.
To finance their conflicts, governments began issuing sovereign bonds later, throughout the Middle Ages. The Bank of England, in fact, is the oldest continuously operating central bank in the world. Formed in the 17th century, its original purpose was to sell bonds to finance the restoration of the British naval. U.S. Treasury bonds, originally issued to fund the country’s armed forces, were created for this very purpose. They were first issued as “War Savings Bonds” to assist fund the American Revolution against British rule and later as “Liberty Bonds” to fund World War I.
Company-issued bond markets are likewise extremely mature. Some of the earliest chartered businesses, including the Dutch East India Company (VOC) and the Mississippi Company, issued debt instruments instead of stocks at the outset. These bonds, like the one pictured below, were personally deliver to the bondholder as “guarantees” or “sureties.”
A 2400 guilder bond at 6% interest issued by the Dutch East India Company on November 7, 1622. Although the bond was created in Middelburg, it was signed in Amsterdam.
Examples of Bond Market
Government-issued bonds, known as “sovereign bonds,” are popular with investors. This is because they pay out the full face value plus interest at maturity. This is why government bonds are so popular among conservative investors. Because a government may always raise taxes or create new money out of thin air. Sovereign debt carries the lowest default risk of any bond.
The United States Treasury bond market is the most active and liquid bond market in the world. Known colloquially as “T-Bills,” Treasury Bills are short-term debt obligations of the United States government guaranteed by the Treasury Department and maturing in one year or less. T-notes, or Treasury Notes, are tradable debt securities issued by the United States government. It bears a fixed rate of interest and is due to expire between one and 10 years from now. “T-Bonds,” or Treasury Bonds, are long-term debt instruments issued by the United States government with a maturity of more than twenty years.
The phrase “bond market” is use to refer to the marketplace for trading various types of debt instruments issued by various companies. Companies and governments can issue bonds to raise capital for operating expenses and strategic initiatives. Like any other investing products like: flex or equity funds, the potential yield on a bond must be balanced against its level of risk. You should now have a better grasp of what a bond market is, its benefits and drawbacks, and the many bond markets available.